Understanding VAT in the United Kingdom (2025)
Last updated: 7 October 2025
Value Added Tax (VAT) is a consumption tax applied to most goods and services sold in the United Kingdom. Although the end consumer ultimately bears the cost, businesses are responsible for collecting VAT and remitting it to HM Revenue & Customs (HMRC). This guide explains how VAT works in practice, registration rules, common rates, how to file, and how to avoid frequent mistakes—all in plain English.
1. VAT Fundamentals
VAT is charged on the value added at each stage of the supply chain. A supplier charges VAT on its sales (output tax) and can typically reclaim the VAT it has paid on purchases (input tax). The net amount is paid to HMRC. Some supplies are taxed at the standard rate, some at reduced or zero rate, and some are exempt. Understanding which category your goods or services fall into is essential for accurate pricing and compliance.
2. VAT Rates Explained
- Standard rate (20%): Applies to most goods and services.
- Reduced rate (5%): Applies to specific items such as domestic fuel and power, and children’s car seats.
- Zero-rated (0%): Applies to many staple items such as most food and printed books/newspapers. Zero-rated supplies are still taxable supplies.
- Exempt: Outside the scope of VAT (e.g., insurance, education, postage stamps). Input VAT is generally not recoverable on exempt supplies.
3. Registration & Threshold (2025)
If your taxable turnover exceeds the VAT registration threshold (currently £90,000 in a rolling 12-month period), you must register for VAT. Voluntary registration can make sense below the threshold if you incur VAT on expenses and your customers are VAT-registered. Keep accurate, up-to-date records to monitor when you approach the threshold.
4. Making Tax Digital (MTD) & Returns
MTD requires businesses to maintain digital records and submit VAT returns using compatible software. Most VAT-registered businesses file quarterly, but some may be on different schemes. Accuracy matters: reconcile output and input VAT, substantiate zero-rated supplies, and retain invoices and evidence for reclaiming VAT.
5. Manual Calculations & Cross-Checks
Add 20% VAT: net × 1.20
Remove 20% VAT: gross ÷ 1.20
Add 5% VAT: net × 1.05
Remove 5% VAT: gross ÷ 1.05Use these as quick checks alongside the VAT calculator. For more complex scenarios (mixed supplies, discounts, partial exemption), consult HMRC guidance or a qualified advisor.
6. Common Pitfalls
- Confusing zero-rated with exempt supplies—this affects whether input VAT can be reclaimed.
- Not updating prices or invoices promptly when VAT rates or thresholds change.
- Insufficient evidence for zero-rating (e.g., exports) or reduced rating.
- Omitting digital record-keeping requirements under MTD.
7. Practical Examples
Example 1: Adding VAT (20%). A service priced at £250 net becomes £300 gross (£250 × 1.20 = £300). Output VAT is £50.
Example 2: Removing VAT (20%). A gross amount of £60 corresponds to £50 net (£60 ÷ 1.20 = £50) and £10 VAT.
Example 3: Reduced rate (5%). A £100 net energy bill becomes £105 gross (£100 × 1.05 = £105).
8. 2025 Notes
Keep an eye on HMRC announcements throughout the year for any changes to VAT rates, thresholds, or reporting rules. Ensure your invoicing and bookkeeping systems can be updated quickly to stay compliant.
References
This article provides general information only and does not constitute tax advice.